Inheritance tax and other tax matters - understand how to calculate and plan for inheritance tax and other taxes relating to probate
Inheritance tax (IHT) is a tax that is payable on the amount of a deceased person’s estate which is not exempt and which exceeds the threshold at the rate of 40%. A person’s estate includes assets (including the deceased’s share of jointly owned assets), some trust interests and certain lifetime gifts, after the deduction of liabilities due at the date of death. Latest figures suggest only 6% of estates were subject to IHT. This is mainly because the majority of estates fall under the IHT threshold.
If the deceased was married or in a civil partnership at the time of death, then anything that passes to the spouse or civil partner is totally exempt from IHT. If the spouse or civil partner is domiciled outside the UK then the exemption is limited.
If the deceased’s will leaves all or part of their estate to a registered charity then that gift shall also be exempt from IHT.
Determining whether a deceased’s estate is liable to IHT and then going on to calculate the amount are important tasks of the personal representatives. The total value of the estate will determine which IHT form has to be filled in, and the form will show how the calculations are made. In most cases, the IHT has to be paid to HMRC before a grant of probate or letters of administration will be issued. For more information see our 'Inheritance tax: calculation and payment' page.
Lifetime gifts are gifts made during the life of the deceased. As a general rule, the value of a lifetime gifts must be added back to the value of the estate before IHT is calculated, if the gift was made less than 7 years before the death. However, there are a number of exceptions to this, for example with regard to small gifts, wedding presents or regular gifts from surplus income. Investigating lifetime gifts is another important task for the personal representatives. For more information see our 'Lifetime gifts' page.
Capital gains tax (CGT) is a tax on any gain or profit made when assets are sold, given away or otherwise disposed of. It applies to most assets, such as shares and property but excludes cash. When assets are passed to beneficiaries on death, no CGT is payable, but it may be payable later if the beneficiary subsequently disposes of it. There is a value attributed to those assets, which is usually the market value as at the date of the death. See our 'Capital gains tax' page for further information.
Income Tax is paid on most types of income received by individuals (and personal representatives) if specific levels are reached.
Since each UK tax year begins on 6th April, there is a potential liability to tax on income received by a deceased person from 6th April to the date of death. This is calculated according to the usual rules of ascertaining income tax.
After the date of death, the estate may continue to receive income until the estate is finally wound up, and that may be taxable in its own right, and payable by the personal representatives.
So it follows that personal representatives will need to finalise the deceased’s income tax to the date of death and then separately for the period of the estate administration. If the deceased’s financial affairs were managed by an accountant, you may wish to ask the accountant to complete the income tax affairs of both the deceased up to the date of death and the estate administration period.
If the deceased was taxed on PAYE, then there is now an automated process by which HMRC calculate any tax owed or refund due. If the deceased was self-assessed for income tax, then HMRC will advise in each case whether a self-assessment return needs to be completed on the deceased’s behalf.
Learn how to calculate and pay inheritance tax, including information about the inheritance tax threshold.
Find out whether you need Form IHT205 or Form IHT400 to apply for probate
Understand the impact of lifetime gifts on inheritance tax, and the duties of personal representatives to investigate
Understand what is Capital Gains Tax, how it affects legacies, and how it is calculated
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